Want to add some shine to your portfolio -- some bling, perhaps? You're in luck. Commodity ETFs now come in gold, silver, and black -- as in oil -- and some even track a diverse basket of commodities. Compared with your typical ETFs, these funds track very distinctive types of investments, ones with market cycles and histories unlike any of your other holdings. And that makes these funds, for the most part, well suited for truly diversifying your portfolio.
Add some glitter to your portfolio
For the past couple of years, gold has been, well, golden as an investment. In late 2004, the streetTRACKS Gold Shares Fund
In April 2006, Barclays provided investors another opportunity to shine up their portfolios when it launched the iShares Silver Trust. The SLV fund can be traded just like any other ETF, while the precious metal that the fund holds is safely secured in a vault.
Black gold ... Texas tea
As crude prices surge on concerns over supply and demand, don't you want to benefit the way the big oil companies have? Until recently, you could buy energy ETFs such as the PowerShares Oil Services Fund
Now, there's the United States Oil Fund
Diversity is nice, twice
Two other ETF options exist for investors who want a more diverse basket of commodities than just oil: the PowerShares DB Commodity Index Tracking Fund
With their concentrations in oil and energy, these funds offer a way to play the energy market. However, their real value is that they open the door, at a low cost, to a broad basket of commodities. That adds diversification to an investment portfolio from a market that was previously closed, or difficult to get exposure to, for most investors.
Commodity markets are marked by longs and shorts, and unless you're able to short commodity ETFs, you're deprived of the full benefits of these securities. But don't take shorting ETFs as a given, since it's usually difficult to short anything other than the largest funds. Keep in mind also that market prices of commodities also tend to be driven by supply-and-demand factors, both real and perceived. Unlike stocks, commodities have no earnings per share or other fundamentals to drive prices. Instead, commercial hedging activities and speculators tend to dominate the commodity markets. Gold price fluctuations, in particular, can be driven by speculators and governments selling off their stockpiles.
Even with their risks, commodities have such low correlations to U.S. equities or bonds that adding them to your portfolio can reduce volatility and increase your returns. As with all investments, some commodity ETFs might turn out to be fool's gold, just pure glitter, while others are the real thing. Learn about the risks involved before you invest.
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This article was originally published on Aug. 16, 2006. At that time, Fool contributor Zoe Van Schyndel did not own any of the funds mentioned in this article. The Motley Fool has a disclosure policy.